A Trade Mission designed to bring together the life settlement industry with institutional investors examining the idea of entering the market brought its message here on February 25.
That message was one of optimism for the asset class tempered by a realization that work still needs to be done to instill investor confidence in a product that offers solid returns but is also in the process of putting past problems behind it, according to speakers of the Mission which is jointly sponsored by the Life Insurance Settlement Association, Orlando, Fla., and the European Life Settlement Association, London.
Life settlements are one of the best investment opportunities in the last two decades, according to Jose Garcia, chief executive officer of Carlisle Management Company. Garcia noted that life settlements offer a great opportunity and Luxembourg’s flexible regulatory and tax environment offer a great place to enter the market. Luxembourg, he continued, manages over two trillion Euros in investments.
From a risk and return perspective determined by the Sharpe ratio, a ratio of three offers four times the benefit of the market, according to Jeff Mulholland, a consultant with Fasano Associates. The Sharpe ratio uses standard deviation to determine risk-adjusted return. It is a cheap, relatively stable, uncorrelated asset, he added.
Brian Casey, a partner with Locke Lord Bissell & Liddell LLP, said that there are signs of interest from pension funds and private equity firms are calling asking for information about life settlements. The interest in life settlements should be no surprise, he added, because it is simply a broader transference of insurance risk to capital markets similar to life insurers securitizing books of business through reinsurance and property-casualty companies reducing risk through catastrophe bonds.
Indeed, during the dialogue, a fund of funds manager was in the audience learning about the product. What he and other attendees heard was that the product is complex and due diligence is a must.
Perhaps the most basic reason is that life settlements are generally large assets, according to Andrew Murphy, chief operating officer of Mosaic. “I highly recommend investors do their due diligence. We don’t sell $10 widgets.” These are large assets that are often equal in size to the purchase of a home, he continued.
The case for performing due diligence is reflected in the fact that if mortality projections are too short, the buyer overpays and if they are too long, the sellers do not get what they should for their policies, according to Roger Tafoya, executive vice president and chief underwriter with ISC Services.
Several other speakers described how due diligence can be performed.
Michael Fasano, president of Fasano Associates, discussed underwriting risk, noting that it is important to use mortality tables based on data that is similar to the life settlement industry. So, for instance, Medicare databases do not have mortality data that is similar enough to life settlements, he said.
And, even with life insurance mortality tables, there is a difference in income and lapsation as well as face amounts of policies which on average are between $1-2 million for life settlements, higher than in the life insurance market, he noted. Life settlement mortality is lower and insureds in this market generally have higher income levels, Fasano added.
Life settlement underwriting is more complicated than life insurance underwriting, he said because life insurance is often purchased by younger and healthier consumers while the life settlement space is populated by older people who may have different impairments that move at different speeds.
Fasano said that there should be a dialogue between the client and an LE firm because there can often be significant differences between LE providers. So, a client should talk with LE providers, even outliers, because the investor may come to the conclusion that the outliers are correct.
Mullholland said that the conservative approach is to throw out the extremes but he would advocate for finding out why those extremes exist. The client should always be provided with all LEs, he added. “It is important to have that look [at all LEs] because investors should no longer leave it to providers.”
Meir Eliav, president of Legacy Benefits LLC, discussed a number of considerations that should be taken into account before purchasing a life settlement. Among those considerations are ensuring that there will not be a contestability challenge and that there is an insurable interest as well as questioning how financing is done so that the policy is not a stranger-originated life insurance (STOLI) contract. If the policy is financed, the investor should make sure that the insured has a financial responsibility.
And, Eliav continued, there should be a check of medical records and other information submitted to ensure that there is not fraud. “It is very important to conduct extensive due diligence with a broker or agent to make sure that you are not dealing with someone who is involved in something that is not desirable.”
And, Eliav added, fee disclosure is very important. Although it is not always required by states in the United States, it is a practice most life settlement providers have adopted and one that goes a long way to making a transaction transparent, he said.
The investor needs to do due diligence on the provider to make sure that there is an acquisition of clean collateral and that there is transparency in both fee structures and any information about the policy, according to Brian Smith, CEO of Life Equity, LLC.
That due diligence is necessary on each policy, he added. “In this marketplace there is not a lot you don’t want to buy but you want to make sure that you find out which ones you don’t want; you want to make sure you use forms in place in each of the states; and have providers who operate in most states.”
Source: Jim Connolly, Life Settlement Review from Luxembourg